A process meant to manage a family's or individual's income and expenses, and ensure funds are available for savings and investment. If expenses exceed income on a regular basis, achieving one's financial goals, such as retirement at a certain age or paying to send children to college, will be difficult to achieve.
Leimberg, Satinsky, Doyle, Jackson, Tools & Techniques of Financial Planning, 7th Edition, Chapter 15
Hallman & Rosenbloom, Personal Financial Planning, 7th Edition, Chapter 2
Budgeting involves estimating income and expenses for a given period of time to allow for development of a financial plan that will allow one to attain financial objectives. A budget allows one to control household expenses and measure progress toward achievement of specific goals, such as retirement, funding a college education or buying a vacation home. A budget is used as a means of financial self-evaluation.
Few individuals enjoy the budgeting performance, and many dislike the required record keeping.
Steps in the budget process:
- Estimate annual income
- Estimate expenditures - Break down expenses between fixed (or nondiscretionary) and discretionary.
- Determine the income surplus or shortfall
- Consider methods to increase income or decrease expenses
- Calculate both income and expenses as a percentage of the total - Consider if there is a better allocation of resources.
II. Emergency fund planning
An emergency fund that can be tapped to meet unexpected expenses is recommended for most families and individuals. Emergencies that may occur and require use of emergency funds include medical expenses, disability, property losses and unemployment.
The recommended size of an emergency fund is usually expressed in terms of monthly income, such as three to six months. Emergency funds should be invested conservatively, such as in a bank or money market account, and easily liquidated when needed.
III. Debt Management Ratios
Personal FinanceLife often gets in the way of perfectly planned out savings. Here are a few tips on how to establish an emergency fund.
Personal FinanceMake a commitment to prevent finances from souring your relationship.
Personal FinanceEmergency funds are considered mandatory by most financial-planning experts, but they can be expensive to hold and ultimately unnecessary.
Personal FinanceA personal budget is a useful tool for tracking your income and expenses.
RetirementLearn how the "sandwich generation" can save for retirement while taking care of their kids and parents.
TradingYou don't need a degree to understand your money, begin saving and pay down debt.
Financial AdvisorSpending is inevitable, but by budgeting carefully, families can enjoy financial security while dodging unnecessary stress or hardship.
Personal FinanceWhich portion of your money belongs in a bank, not somewhere else?
Personal FinanceWhat is an emergency fund, and why is it often the first component of sound financial planning?
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